Can the taxpayer afford self-funded retirement?
Australian taxpayers contributed $30.2 billion to the private accounts of that portion of the population with superannuation 2011-12. By 2015-16 this sum is projected by Treasury to rise to more than $45 billion by which time it will be, by far, the single largest area of government expenditure.
By 2015-16 the taxpayer contribution of $45 billion to private superannuation balances will account for almost twice the $24 billion projected to be spent on defence in that year. Indeed, the $45 billion subsidy is almost as much as the $51 billion provided by the Commonwealth to the states in 2012-13 and territories to provide health, education and other essential services.
By 2015-16 the annual cost of taxpayer contributions for private superannuation will again exceed the annual cost of the age pension. That said, from that point on, taxpayer subsidies for superannuation are likely to grow significantly faster than the annual cost of providing the age pension.
According to Treasury the top five per cent of income earners receive 37 per cent of all superannuation tax concessions. While comprehensive data matching individual's wealth and income is not available we do know that the net worth of the highest income quintile (that is, wealthiest 20 per cent of the population) was $2.2 million per household in 2009-10.
The non-housing assets of that top 20 per cent averaged $1.4 million. Given that the assets test for the age pension currently means that no pension is payable to a single person with assets of more than $696,250 (excluding the family home) it would appear that a significant proportion of tax concessions for superannuation are going to individuals who will almost certainly be ineligible for the age pension.
While we know from Treasury that a disproportionate share of the benefits of tax concessions for superannuation accrue to the highest income earners we also know from the ABS that none of the benefits go to Australia's lowest income earners. Despite Australia's superannuation system often being described as 'universal' in fact a substantial portion of the working age population does not make contributions to superannuation and, in turn, receive none of the $30 billion available to 'boost retirement incomes'.
Superannuation tax concessions can only 'boost' the retirement incomes of those who contribute, and it 'boosts' those income proportionate to the level of contribution. Put simply, superannuation tax concessions are designed in such a way that the more income a person earns the more taxpayer support they will receive. Those Australians who cannot work receive nothing.
While it is possible that such an inequitable system design maximises the capacity of the superannuation tax concessions to 'take pressure' off the age pension such an outcome is highly unlikely, especially as it is low income earners who are the most likely to rely on the age pension and very high income earners who do not. The belief that the tens of billions per year spent on taxpayer contributions to private retirement accounts 'takes pressure off' the commonwealth budget may be widespread but the source of this belief is not well documented. The sheer size, and rate of escalation, of the cost of tax concessions for superannuation combined with the small reduction in the expected number of retirees who do not receive the age pension make clear that it is unlikely that the current subsidies will deliver long run savings for the overall budget.
That said, a closer look at the detailed design features of the current superannuation arrangements make clear that the architects of the system had goals that are quite divergent from minimising the future cost of the age pension. Consider the following:
• If the Howard and Costello Government were worried about the impact of baby boomers on the cost of providing the age pension why did they substantially loosen the age pension means and assets tests in 2007?
• If the objective of the subsidies for superannuation is to reduce the cost of the age pension why can people access their super at 55 when they cannot access the age pension until they are 65? • If the objective of the subsidies for superannuation is to reduce the cost of the age pension why can people take their super in the form of a lump sum, spend it all, and still be eligible for the age pension?
• If the objective of the subsidies for superannuation is to reduce the cost of the age pension why can people who already hold more assets than the amount prescribed in the assets test continue to make concessional contributions?
• If the objective of the subsidies for superannuation is to reduce the cost of the age pension why don't the poorest third of the population, the third of the population most likely to rely solely on the age pension, receive any of the $45 billion contributions?
• If the cost of providing tax concessions for superannuation are greater than the cost of providing the cost of providing the age pension how could substituting the former for the latter save the government money? Whatever the rationales for the creation of the current system of tax concessions for superannuation, minimising the future cost of the age pension does not appear to be among them.